Attached files

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EX-32.2 - EX-32.2 - WELLTOWER INC.exhibit32-2.htm
EX-32.1 - EX-32.1 - WELLTOWER INC.exhibit32-1.htm
EX-31.2 - EX-31.2 - WELLTOWER INC.exhibit31-2.htm
EX-31.1 - EX-31.1 - WELLTOWER INC.exhibit31-1.htm
EX-12 - EX-12 - WELLTOWER INC.exhibit12.htm
EX-10.3 - EX-10.3 - WELLTOWER INC.exhibit10-3.htm
EX-10.2 - EX-10.2 - WELLTOWER INC.exhibit10-2.htm
EX-10.1 - EX-10.1 - WELLTOWER INC.exhibit10-1.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                      

Commission file number: 1-8923

WELLTOWER INC.

 

(Exact name of registrant as specified in its charter

 

 

 

Delaware

 

34-1096634

 

 

 

(State or other jurisdiction of

 incorporation or organization)

 

(I.R.S. Employer

 Identification No.)

 

 

 

4500 Dorr Street, Toledo, Ohio

 

43615

 

 

 

(Address of principal executive offices)

 

(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)  

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☑  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer  

 

Accelerated filer o  

 

Non-accelerated filer   o

 (Do not check if a smaller reporting company)

 

Smaller reporting company o  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  ☑

As of October 31, 2017, the registrant had 370,356,835 shares of common stock outstanding.  

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets — September 30, 2017 and December 31, 2016

3

 

 

Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2017 and 2016

4

 

 

Consolidated Statements of Equity — Nine months ended September 30, 2017 and 2016

6

 

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2017 and 2016

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

51

 

 

Item 4. Controls and Procedures

52

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

52

 

53

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

Item 5. Other Information

53

 

 

Item 6. Exhibits

53

 

 

Signatures

54

 

  

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

 

  

(Unaudited)

 

(Note)

Assets:  

 

 

 

 

 

Real estate investments:  

 

 

 

 

 

 

Real property owned:  

 

 

 

 

 

 

 

Land and land improvements  

$

2,806,586

 

$

2,591,071

 

 

Buildings and improvements  

 

26,010,364

 

 

24,496,153

 

 

Acquired lease intangibles  

 

1,492,279

 

 

1,402,884

 

 

Real property held for sale, net of accumulated depreciation  

 

70,995

 

 

1,044,859

 

 

Construction in progress  

 

344,742

 

 

506,091

 

 

 

Gross real property owned  

 

30,724,966

 

 

30,041,058

 

 

Less accumulated depreciation and amortization  

 

(4,826,418)

 

 

(4,093,494)

 

 

 

Net real property owned  

 

25,898,548

 

 

25,947,564

 

Real estate loans receivable  

 

496,850

 

 

622,628

 

 

Less allowance for losses on loans receivable  

 

(5,406)

 

 

(6,563)

 

 

 

Net real estate loans receivable  

 

491,444

 

 

616,065

 

Net real estate investments  

 

26,389,992

 

 

26,563,629

Other assets:  

 

 

 

 

 

 

 

Investments in unconsolidated entities  

 

407,507

 

 

457,138

 

 

Goodwill  

 

68,321

 

 

68,321

 

 

Cash and cash equivalents  

 

236,247

 

 

419,378

 

 

Restricted cash  

 

59,064

 

 

187,842

 

 

Straight-line rent receivable

 

393,142

 

 

342,578

 

 

Receivables and other assets  

 

626,106

 

 

826,298

 

 

 

Total other assets  

 

1,790,387

 

 

2,301,555

Total assets  

$

28,180,379

 

$

28,865,184

 

 

 

 

  

 

 

 

 

 

Liabilities and equity  

 

 

 

 

 

Liabilities:  

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility  

$

420,000

 

$

645,000

 

 

Senior unsecured notes  

 

8,315,395

 

 

8,161,619

 

 

Secured debt  

 

2,713,513

 

 

3,477,699

 

 

Capital lease obligations  

 

72,684

 

 

73,927

 

 

Accrued expenses and other liabilities  

 

1,027,375

 

 

827,034

Total liabilities  

 

12,548,967

 

 

13,185,279

Redeemable noncontrolling interests  

 

386,748

  

  

398,433

Equity:  

 

 

 

 

 

 

 

Preferred stock  

 

718,503

 

 

1,006,250

 

 

Common stock  

 

371,012

 

 

363,071

 

 

Capital in excess of par value  

 

17,564,805

 

 

16,999,691

 

 

Treasury stock  

 

(62,363)

 

 

(54,741)

 

 

Cumulative net income  

 

5,416,427

 

 

4,803,575

 

 

Cumulative dividends  

 

(9,138,346)

 

 

(8,144,981)

 

 

Accumulated other comprehensive income (loss)  

 

(141,240)

 

 

(169,531)

 

 

Other equity  

 

1,127

 

 

3,059

 

 

 

Total Welltower Inc. stockholders’ equity  

 

14,729,925

 

 

14,806,393

 

 

Noncontrolling interests  

 

514,739

 

 

475,079

Total equity  

 

15,244,664

 

 

15,281,472

Total liabilities and equity  

$

28,180,379

 

$

28,865,184

 

NOTE: The consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

See notes to unaudited consolidated financial statements

 

3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands, except per share data)

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Rental income  

$

362,880

 

$

421,152

 

$

1,085,621

 

$

1,259,442

 

Resident fees and services

 

702,380

 

 

630,017

 

 

2,049,757

 

 

1,847,386

 

Interest income

 

20,187

 

 

25,080

 

 

61,836

 

 

74,275

 

Other income

 

6,036

 

 

2,884

 

 

15,169

 

 

21,735

 

 

Total revenues

 

1,091,483

 

 

1,079,133

 

 

3,212,383

 

 

3,202,838

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

122,578

 

 

129,699

 

 

357,405

 

 

394,985

 

Property operating expenses

 

523,997

 

 

473,680

 

 

1,536,021

 

 

1,382,148

 

Depreciation and amortization

 

230,138

 

 

218,061

 

 

683,262

 

 

673,326

 

General and administrative

 

29,913

 

 

36,828

 

 

93,643

 

 

122,434

 

Transaction costs

 

-

 

 

19,842

 

 

-

 

 

33,207

 

Loss (gain) on derivatives, net

 

324

 

 

(2,516)

 

 

2,284

 

 

(2,516)

 

Loss (gain) on extinguishment of debt, net

 

-

 

 

-

 

 

36,870

 

 

9

 

Impairment of assets

 

-

 

 

9,705

 

 

24,662

 

 

24,019

 

Other expenses

 

99,595

 

 

-

 

 

117,608

 

 

3,161

 

 

Total expenses

 

1,006,545

 

 

885,299

 

 

2,851,755

 

 

2,630,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

and income from unconsolidated entities

 

84,938

 

 

193,834

 

 

360,628

 

 

572,065

Income tax (expense) benefit

 

(669)

 

 

305

 

 

5,535

 

 

2,543

Income (loss) from unconsolidated entities

 

3,408

 

 

(1,749)

 

 

(23,676)

 

 

(7,528)

Income (loss) from continuing operations

 

87,677

 

 

192,390

 

 

342,487

 

 

567,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on real estate dispositions, net

 

1,622

 

 

162,351

 

 

287,869

 

 

163,881

Net income

 

89,299

 

 

354,741

 

 

630,356

 

 

730,961

Less:

Preferred stock dividends

 

11,676

 

 

16,352

 

 

37,734

 

 

49,055

Less:

Preferred stock redemption charge

 

-

 

 

-

 

 

9,769

 

 

-

Less:

Net income (loss) attributable to noncontrolling interests(1)

 

3,580

 

 

3,479

 

 

7,735

 

 

2,553

Net income (loss) attributable to common stockholders

$

74,043

 

$

334,910

 

$

575,118

 

$

679,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

369,089

 

 

358,932

 

 

366,096

 

 

356,911

 

Diluted

 

370,740

 

 

361,237

 

 

367,894

 

 

358,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions

$

0.20

 

$

0.93

 

$

1.57

 

$

1.90

 

Net income (loss) attributable to common stockholders*

$

0.20

 

$

0.93

 

$

1.57

 

$

1.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions

$

0.20

 

$

0.93

 

$

1.56

 

$

1.89

 

Net income (loss) attributable to common stockholders*

$

0.20

 

$

0.93

 

$

1.56

 

$

1.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

$

0.87

 

$

0.86

 

$

2.61

 

$

2.58

 

* Amounts may not sum due to rounding

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

See notes to unaudited consolidated financial statements

 

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

Net income

$

89,299

 

$

354,741

 

$

630,356

 

$

730,961

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gain (loss) on equity investments

 

(3,808)

 

 

5,908

 

 

(20,285)

 

 

(5,252)

 

Change in net unrealized gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on cash flow hedges

 

2

 

 

401

 

 

2

 

 

1,371

 

Unrecognized actuarial gain (loss)

 

-

 

 

(2)

 

 

-

 

 

-

 

Foreign currency translation gain (loss)

 

37,343

 

 

516

 

 

70,769

 

 

(48,496)

Total other comprehensive income (loss)

 

33,537

 

 

6,823

 

 

50,486

 

 

(52,377)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

122,836

 

 

361,564

 

 

680,842

 

 

678,584

Less: Total comprehensive income (loss) attributable to noncontrolling interests(1)

 

14,732

 

 

1,846

 

 

29,930

 

 

13,117

Total comprehensive income (loss) attributable to common stockholders

$

108,104

 

$

359,718

 

$

650,912

 

$

665,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

5


CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

Common

Excess of

Treasury

Cumulative

Cumulative

Comprehensive

Other

Noncontrolling

 

 

 

 

 

Stock

Stock

Par Value

Stock

Net Income

Dividends

Income (Loss)

Equity

Interests

Total

Balances at beginning of period

$

1,006,250

$

363,071

$

16,999,691

$

(54,741)

$

4,803,575

$

(8,144,981)

$

(169,531)

$

3,059

$

475,079

$

15,281,472

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

622,621

 

 

 

 

 

 

 

9,907

 

632,528

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

28,291

 

 

 

22,195

 

50,486

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

683,014

Net change in noncontrolling interests

 

 

 

  

 

9,784

 

 

 

 

 

 

 

 

 

 

 

7,558

 

17,342

Amounts related to stock incentive plans, net of forfeitures

 

 

 

337

 

17,151

 

(7,611)

 

 

 

 

 

 

 

(1,942)

 

 

 

7,935

Proceeds from issuance of common stock

 

 

 

7,513

 

522,954

 

 

 

 

 

 

 

 

 

 

 

 

 

530,467

Redemption of preferred stock

 

(287,500)

 

 

 

9,760

 

 

 

(9,769)

 

 

 

 

 

 

 

 

 

(287,509)

Redemption of equity membership units

 

 

 

91

 

5,465

 

(11)

 

 

 

 

 

 

 

 

 

 

 

5,545

 Conversion of preferred stock

 

(247)

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

(247)

Option compensation expense

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

10

Dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(955,631)

 

 

 

 

 

 

 

(955,631)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(37,734)

 

 

 

 

 

 

 

(37,734)

Balances at end of period

$

718,503

$

371,012

$

17,564,805

$

(62,363)

$

5,416,427

$

(9,138,346)

$

(141,240)

$

1,127

$

514,739

$

15,244,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

Common

Excess of

Treasury

Cumulative

Cumulative

Comprehensive

Other

Noncontrolling

 

 

 

 

 

Stock

Stock

Par Value

Stock

Net Income

Dividends

Income (Loss)

Equity

Interests

Total

Balances at beginning of period

$

1,006,250

$

354,811

$

16,478,300

$

(44,372)

$

3,725,772

$

(6,846,056)

$

(88,243)

$

4,098

$

585,325

$

15,175,885

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

728,408

 

 

 

 

 

 

 

7,363

 

735,771

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(62,941)

 

 

 

10,564

 

(52,377)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

683,394

Net change in noncontrolling interests

 

 

 

  

 

(45,765)

 

 

 

 

 

 

 

 

 

 

 

(128,859)

 

(174,624)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

689

 

38,888

 

(7,822)

 

 

 

 

 

 

 

(1,285)

 

 

 

30,470

Proceeds from issuance of common stock

 

 

 

7,203

 

512,139

 

 

 

 

 

 

 

 

 

 

 

 

 

519,342

Option compensation expense

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

207

 

 

 

207

Dividends paid:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(921,381)

 

 

 

 

 

 

 

(921,381)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(49,055)

 

 

 

 

 

 

 

(49,055)

Balances at end of period

$

1,006,250

 

362,703

 

16,983,562

 

(52,194)

 

4,454,180

 

(7,816,492)

 

(151,184)

 

3,020

 

474,393

$

15,264,238

 

See notes to unaudited consolidated financial statements

 

6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

Nine Months Ended

 

 

 

  

September 30,

 

 

 

  

2017

 

2016

Operating activities:  

 

 

 

 

 

Net income  

$

630,356

 

$

730,961

Adjustments to reconcile net income to  

 

 

 

 

 

 

net cash provided from (used in) operating activities:  

 

 

 

 

 

 

 

Depreciation and amortization  

 

683,262

 

 

673,326

 

 

Other amortization expenses  

 

12,095

 

 

5,419

 

 

Impairment of assets  

 

24,662

 

 

24,019

 

 

Stock-based compensation expense  

 

16,459

 

 

20,618

 

 

Loss (gain) on derivatives, net  

 

2,284

 

 

(2,516)

 

 

Loss (gain) on extinguishment of debt, net  

 

36,870

 

 

9

 

 

Loss (income) from unconsolidated entities

 

23,676

 

 

7,528

 

 

Rental income in excess of cash received  

 

(64,865)

 

 

(60,212)

 

 

Amortization related to above (below) market leases, net  

 

180

 

 

362

 

 

Loss (gain) on sales of properties, net  

 

(287,869)

 

 

(163,881)

 

 

Distributions by unconsolidated entities

 

116

 

 

473

 

 

Increase (decrease) in accrued expenses and other liabilities  

 

171,713

 

 

79,619

 

 

Decrease (increase) in receivables and other assets  

 

(86,475)

 

 

(35,557)

Net cash provided from (used in) operating activities  

 

1,162,464

 

 

1,280,168

 

 

 

  

 

 

 

 

 

Investing activities:  

 

 

 

 

 

 

Cash disbursed for acquisitions  

 

(575,694)

 

 

(1,448,126)

 

Cash disbursed for capital improvements to existing properties

 

(159,142)

 

 

(141,200)

 

Cash disbursed for construction in progress

 

(198,068)

 

 

(325,372)

 

Capitalized interest  

 

(10,033)

 

 

(12,109)

 

Investment in real estate loans receivable  

 

(70,051)

 

 

(105,496)

 

Other investments, net of payments  

 

50,877

 

 

(88,398)

 

Principal collected on real estate loans receivable  

 

82,263

 

 

225,092

 

Contributions to unconsolidated entities  

 

(73,802)

 

 

(41,747)

 

Distributions by unconsolidated entities  

 

58,754

 

 

72,564

 

Proceeds from (payments on) derivatives  

 

55,771

 

 

56,842

 

Decrease (increase) in restricted cash  

 

130,470

 

 

(21,218)

 

Proceeds from sales of real property  

 

1,237,851

 

 

538,032

Net cash provided from (used in) investing activities  

 

529,196

 

 

(1,291,136)

 

 

 

  

 

 

 

 

 

Financing activities:  

 

 

 

 

 

 

Net increase (decrease) under unsecured credit facilities  

 

(225,000)

 

 

515,000

 

Proceeds from issuance of senior unsecured notes  

 

7,500

 

 

693,560

 

Payments to extinguish senior unsecured notes  

 

(5,000)

 

 

(400,000)

 

Net proceeds from the issuance of secured debt  

 

190,459

 

 

193,541

 

Payments on secured debt  

 

(1,050,879)

 

 

(471,898)

 

Net proceeds from the issuance of common stock  

 

530,992

 

 

520,067

 

Redemption of preferred stock  

 

(287,500)

 

 

-

 

Payments for deferred financing costs and prepayment penalties  

 

(54,027)

 

 

(18,831)

 

Contributions by noncontrolling interests(1)

 

47,209

 

 

142,381

 

Distributions to noncontrolling interests(1)

 

(51,824)

 

 

(106,076)

 

Cash distributions to stockholders  

 

(992,621)

 

 

(970,436)

 

Other financing activities

 

(8,416)

 

 

(8,941)

Net cash provided from (used in) financing activities  

 

(1,899,107)

 

 

88,367

Effect of foreign currency translation on cash and cash equivalents

 

24,316

 

 

(9,690)

Increase (decrease) in cash and cash equivalents  

 

(183,131)

 

 

67,709

Cash and cash equivalents at beginning of period  

 

419,378

 

 

360,908

Cash and cash equivalents at end of period  

$

236,247

 

$

428,617

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

$

312,896

 

$

360,421

 

Income taxes paid

 

5,606

 

 

7,070

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

See notes to unaudited consolidated financial statements

 

7


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Business

 

     Welltower Inc., an S&P 500 company headquartered in Toledo, Ohio, is driving the transformation of health care infrastructure. The company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate and infrastructure needed to scale innovative care delivery models and improve people’s wellness and overall health care experience.  Welltower™, a real estate investment trust (“REIT”), owns interests in properties concentrated in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties.  Founded in 1970, we were the first REIT to invest exclusively in health care facilities.

 

2. Accounting Policies and Related Matters

     Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (such as normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2017 are not necessarily an indication of the results that may be expected for the year ending December 31, 2017. For further information, refer to the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

     New Accounting Standards     

     In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.  ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted beginning after December 15, 2016.  A reporting entity may apply the new standard using either a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach.  We are currently evaluating the impact that the adoption of the standard will have on our consolidated financial statements and have not yet determined the method by which we will adopt the new standard.  A significant source of our revenue is generated through leasing arrangements, which are specifically excluded from ASU 2014-09. We anticipate that we will be required to separately disclose the components of total revenue between lease revenue accounted for under existing leasing guidance and service revenue accounted for under ASU 2014-09, including non-lease components such as certain services embedded in base leasing fees.  Under ASU 2014-09, revenue recognition for real estate sales is mainly based on the transfer of control versus current guidance of continuing involvement.  We expect that the new guidance will result in more transactions qualifying as sales of real estate and being recognized at an earlier date than under the current guidance.

     In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which will require entities to measure their investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception.  The practicability exception will be available for equity investments that do not have readily determinable fair values. ASU 2016-01 is effective for fiscal years and interim periods within those years, beginning after December 15, 2017.  We are currently evaluating the impact that the standard will have on our consolidated financial statements.

     In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term.  It will also require disclosures designed to give financial statement users information regarding amount, timing, and uncertainty of cash flows arising from leases.  ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted.  Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.  We are currently evaluating the impact of this standard on our consolidated financial statements.  We believe that the adoption of this standard will likely have a material impact to our consolidated balance sheet for the recognition of certain operating leases as right-of-use assets and lease liabilities.  We are in the process of analyzing our lease portfolio and evaluating systems to comply with the standard’s retrospective adoption requirements

     In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which

8


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

allows companies to make a policy election as to whether they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur.  ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted.  We adopted ASU 2016-09 on January 1, 2017, and we elected to account for forfeitures as they occur. This election had an immaterial impact on our consolidated financial statements.  The standard also requires an employer to classify as a financing activity in the statement of cash flow the cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation.  This aspect of the standard is required to be applied on a retrospective basis and resulted in an increase in net cash provided by operating activities and a decrease in net cash used in financing activities of $7,822,000 for the nine months ended September 30, 2016.  Upon adoption, no other provisions of ASU 2016-09 had an effect on our unaudited consolidated financial statements or related footnote disclosures.

     In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” which requires a new forward-looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments.  ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018.  We are currently evaluating the impact that the standard will have on our consolidated financial statements

     In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business,” which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.  ASU 2017-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted.  A reporting entity must apply ASU 2017-01 using a prospective approach.  We adopted ASU 2017-01 on January 1, 2017 and as a result, have classified our real estate acquisitions completed during the nine months ended September 30, 2017 as asset acquisitions rather than business combinations due to the fact that substantially all of the fair value of the gross assets acquired were concentrated in a single asset or group of similar identifiable assets. We have recorded identifiable assets acquired, liabilities assumed and any noncontrolling interests associated with any asset acquisitions at cost on a relative fair value basis and have capitalized transaction costs incurred.

     In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities,” which expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are currently in the process of evaluating the effects this standard will have on our consolidated financial statements.

  

3. Real Property Acquisitions and Development

 

     The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets, liabilities and noncontrolling interests based upon their relative fair values in accordance with our accounting policies. The results of operations for these acquisitions have been included in our consolidated results of operations since the date of acquisition and are a component of the appropriate segments.  Transaction costs primarily represent costs incurred with acquisitions, including due diligence costs, fees for legal and valuation services and termination of pre-existing relationships computed based on the fair value of the assets acquired, lease termination fees and other acquisition-related costs.  Effective January 1, 2017, with our adoption of ASU 2017-01, transaction costs related to asset acquisitions are capitalized as a component of purchase price and all other non-capitalizable costs are reflected in “Other Expenses” on our Consolidated Statements of Comprehensive Income. Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. See Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for information regarding our foreign currency policies.  

9


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Triple-net Activity

 

 

Nine Months Ended

 

(In thousands)

September 30, 2017

September 30, 2016

 

Land and land improvements

 

$

31,948

 

$

21,713

 

Buildings and improvements

 

 

206,910

 

 

220,274

 

Acquired lease intangibles

 

 

-

 

 

2,876

 

 

Total assets acquired

 

 

238,858

 

 

244,863

 

Accrued expenses and other liabilities  

 

 

(21,236)

 

 

(2,145)

 

 

Total liabilities assumed

 

 

(21,236)

 

 

(2,145)

 

Noncontrolling interests

 

 

(7,275)

 

 

(3,162)

 

Non-cash acquisition related activity(1)

 

 

(54,901)

 

 

(51,733)

 

 

Cash disbursed for acquisitions

 

 

155,446

 

 

187,823

 

Construction in progress additions

 

 

106,186

 

 

133,611

 

Less:

Capitalized interest

 

 

(3,886)

 

 

(6,263)

 

 

Foreign currency translation

 

 

(656)

 

 

(3,179)

 

Cash disbursed for construction in progress

 

 

101,644

 

  

124,169

 

Capital improvements to existing properties

 

 

17,873

 

 

21,447

 

 

Total cash invested in real property, net of cash acquired

 

$

274,963

 

$

333,439

 

 

 

 

 

 

 

 

 

 

(1) For the nine months ended September 30, 2017, $54,901,000 is related to the acquisition of assets previously financed as real estate loans receivable. For the nine months ended September 30, 2016, $45,044,000 is related to the acquisition of assets previously financed as real estate loans receivable and $6,689,000 is related to the acquisition of assets previously financed as an investment in an unconsolidated entity.

 

     Seniors Housing Operating Activity

 

 

Nine Months Ended

 

(In thousands)

September 30, 2017

September 30, 2016

 

Land and land improvements

 

$

31,006

 

$

122,649

 

Building and improvements

 

 

384,522

 

 

1,108,195

 

Acquired lease intangibles

 

 

48,197

 

 

90,771

 

Restricted cash

 

 

1,692

 

 

137

 

Receivables and other assets

 

 

3,164

 

 

2,179

 

  

Total assets acquired(1)

 

 

468,581

 

 

1,323,931

 

Secured debt

 

 

-

 

 

(49,381)

 

Accrued expenses and other liabilities  

 

 

(43,364)

 

 

(12,328)

 

 

Total liabilities assumed

 

 

(43,364)

 

 

(61,709)

 

Noncontrolling interests

 

 

(4,701)

 

 

(1,089)

 

Non-cash acquisition related activity(2)

 

 

(59,065)

 

 

(17,477)

 

 

Cash disbursed for acquisitions

 

 

361,451

 

 

1,243,656

 

Construction in progress additions

 

 

65,282

 

 

139,160

 

Less:

Capitalized interest

 

 

(5,996)

 

 

(3,923)

 

 

Foreign currency translation

 

 

(6,218)

 

 

(5,953)

 

Cash disbursed for construction in progress

 

 

53,068

 

  

129,284

 

Capital improvements to existing properties

 

 

110,372

 

 

84,444

 

 

Total cash invested in real property, net of cash acquired

 

$

524,891

 

$

1,457,384

 

 

 

 

 

 

 

 

 

 

(1) Excludes $4,581,000 and $135,000 of cash acquired during the nine months ended September 30, 2017 and 2016, respectively.

(2) Includes $6,349,000 related to the acquisition of assets previously financed as real estate loans receivable during the nine months ended September 30, 2017.  Includes $51,097,000 and $17,477,000 for the nine months ended September 30, 2017 and 2016, respectively, related to the acquisition of assets previously financed as an investments in an unconsolidated entity.

10


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Outpatient Medical Activity

 

 

Nine Months Ended

 

(In thousands)

September 30, 2017

 

September 30, 2016

 

Land and land improvements

 

$

25,060

 

$

1,466

 

Buildings and improvements

 

 

62,336

 

 

27,272

 

Acquired lease intangibles

 

 

8,397

 

 

4,592

 

Receivables and other assets

 

 

3

 

 

-

 

  

Total assets acquired

 

 

95,796

 

  

33,330

 

Secured debt

 

 

(25,709)

 

 

-

 

Accrued expenses and other liabilities

 

 

(2,210)

 

 

(1,670)

 

 

Total liabilities assumed  

 

 

 (27,919)  

 

 

 (1,670)  

 

Noncontrolling interests

 

 

(9,080)

 

 

-

 

Non-cash acquisition activity(1)

 

 

-

 

 

(15,013)

 

 

Cash disbursed for acquisitions

 

 

58,797

 

 

16,647

 

Construction in progress additions

 

 

33,495

 

 

81,843

 

Less:

Capitalized interest

 

 

(1,847)

 

 

(2,588)

 

 

Accruals(2)

 

 

11,708

 

 

(7,336)

 

Cash disbursed for construction in progress

 

 

43,356

 

  

71,919

 

Capital improvements to existing properties

 

 

30,897

 

 

35,309

 

 

Total cash invested in real property

 

$

133,050

 

$

123,875

 

 

 

 

 

 

 

 

 

 

(1) Represents the acquisition of assets previously financed as real estate loans receivable.

(2) Represents the change in non-cash consideration accruals for amounts to be paid in periods other than the period in which the construction projects converted to operations.

 

      Construction Activity

 

     The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented (in thousands):

 

 

 

 

Nine Months Ended

 

 

 

 

September 30, 2017

 

September 30, 2016

 

Development projects:

 

 

 

 

 

 

 

 

 

 

Triple-net

  

 

$

283,472

 

 

$

24,535

 

 

Seniors housing operating

 

 

 

3,634

 

 

 

-

 

 

Outpatient medical

 

 

 

63,036

 

 

 

44,113

 

Total development projects

 

 

 

350,142

 

 

 

68,648

 

Expansion projects

 

 

 

10,336

 

 

 

2,879

Total construction in progress conversions

  

 

$

360,478

 

 

$

71,527

 

4. Real Estate Intangibles

 

     The following is a summary of our real estate intangibles, excluding those classified as held for sale, as of the dates indicated (dollars in thousands):

11


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

September 30, 2017

 

December 31, 2016

Assets:

  

 

 

 

 

 

 

In place lease intangibles

  

$

1,333,368

 

$

1,252,143

 

Above market tenant leases

  

 

64,408

 

 

61,700

 

Below market ground leases

  

 

62,224

 

 

61,628

 

Lease commissions

  

 

32,279

 

 

27,413

 

Gross historical cost

  

 

1,492,279

 

 

1,402,884

 

Accumulated amortization

  

 

(1,098,814)

 

 

(966,714)

 

Net book value

  

$

393,465

 

$

436,170

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

14.5

 

 

13.7

 

 

  

 

 

 

 

 

Liabilities:

  

 

 

 

 

 

 

Below market tenant leases

  

$

90,671

 

$

89,468

 

Above market ground leases

  

 

8,540

 

 

8,107

 

Gross historical cost

  

 

99,211

 

 

97,575

 

Accumulated amortization

  

 

(57,449)

 

 

(52,134)

 

Net book value

  

$

41,762

 

$

45,441

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

15.5

 

 

15.2

 

     The following is a summary of real estate intangible amortization for the periods presented (in thousands):

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

  

 

2017

 

2016

 

2017

 

2016

Rental income related to above/below market tenant leases, net

 

$

173

 

$

278

 

$

745

 

$

569

Property operating expenses related to above/below market ground leases, net

 

 

(306)

 

 

(309)

 

 

(925)

 

 

(931)

Depreciation and amortization related to in place lease intangibles and lease commissions

 

 

(34,270)

 

 

(30,137)

 

 

(109,011)

 

 

(95,610)

 

     The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):

 

 

 

Assets

 

 

Liabilities

2017

 

$

39,678